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Thursday, March 29, 2012

Inconvenient Studies

A number of commentators on the last post seemed surprised by my claim that U.S. monetary policy exacerbated the shortage of safe asset problem during the early-to-mid 2000s. The argument that the Fed can influence the global demand for safe assets should not be controversial. The Fed, after all, has an inordinate impact on global monetary conditions and can influence long-term yields by managing expectations. Obviously, the Fed is not the only determinant of global safe asset demand as I have acknowledged manytimes by noting there was a structural component as well. And yes, financial innovations, poor governance, misaligned creditor incentives, and other private sector failings played a role too. But to claim the Fed had no influence on the demand for safe assets during the housing boom requires ignoring what seems to me to be the obvious. It also requires ignoring what folks on Wall Street have to say. It also ignores rigorous empirical studies by folks at the Bank of England, the ECB, and the OECD. It is a shame that these studies are ignored by Bernanke and other apologists of Fed policy during the housing boom.

2 comments:

As I just wrote on the previous thread, perhaps the difference between my interpretation and yours David is that I would associate the boom more with the Fed's lack of attention to financial stability (especially the "Greenspan put") than contemporaneous easy monetary policy.

To be fair, Bernanke did acknowledge that regulatory failures by the Fed played a role. What he or anyone else at the Fed has yet to do is acknowledge the stance of monetary policy played a role. These studies--and there are more--show the stance mattered.